Actuarial Note on Workmen's Compensation

In 1971 Ron Ferguson documented the annuity mathematics necessary to establish reserves for lifetime workmen’s (now workers) compensation cases. This paper provides a quarter century update, complete with personal computer spreadsheet application to illustrate various features of a tabular reserving system. Since 1971 statutory aggregate amount and duration limitations have disappeared. Understanding the impact of inflation on catastrophic medical permanent and total disability cases is crucial from a reserving perspective. Use of non-proportional reinsurance as a risk management tool is revisited. Layering of catastrophic claims is demonstrated, demystifying some oftentimes falsely held notions. Several illustrations provide some sensitivity analysis concerning the interaction of mortality and claim cost structure. Both indemnity and medical expenses are modeled by annuities. As argument is made for the inclusion of escalation of indemnity (where applicable) and medical inflation within the annuity mathematics to provide a proper forecast of the individual gross loss and to layer that loss properly. This moves the "loss development" provision away from IBNR reserves and into case reserves, providing greater accuracy and clarity to experience. This applies to gross, retrocessional, and net claim reserves. Since the reserve is a sum of future periodic payments (amount of future payment times probability of surviving to collect the benefit), an accurate discounting of the estimated payments is readily available. Comparisons of company results with Reinsurance Association of America development statistics are shown, since traditional link ratio analysis has shortcomings. Traditional IBNR methods forecast insufficient future values on past loss events.